Strategic assessment - Ericsson

A short outline as at March 2004

Dossier / Travail , 2004 , 11 Pages , Note: Distinction

Gestion d'entreprise - Direction d'entreprise, Management, Organisation

Introduction

By the end of the eighties the old Swedish telephone company Ericsson stood strong. They had a diversified revenue income stream, operating in defence, radar and second in the world in landline telecom, after the American giant AT&T. Also, a little research project that had started in a lab outside Gothenburg had started to take off. This was wireless telecom and had been identified to have a huge market potential by top management. This new business demanded heavy investments in cutting edge technology but revenue came in from all parts of the firm and Ericsson had the investor’s confidence, backed by the two strongest business spheres in Sweden. At the same time there was a similar company in the neighbour country of Finland. Nokia, an old engineering company, offered similar products but had lived in the shadow of Ericsson. Wireless telecom took of and together with internet soon became the growth industry of the nighties. Every trader on Wall Street all by a sudden knew about these two companies from the remote north of Europe. In a rapidly growing market there was money to be made for all players in this field but when the stock market rally of the nineties was over, its little brother from Finland outperformed Ericsson. This paper will look at the strategic paths these companies took and why the smaller player managed to outperform the giant.

Focal firm

Lars Eric Ericsson founded Ericsson 1876. Ericsson has always been a technological driven company, usually with engineers as top management. Ericsson is a diversified company operating in defence, radar, telephone and wireless telephone. Although a diversified engineering company, Ericsson’s tremendous growth during the nineties comes from their expertise wireless telephoning. This includes mobile systems, components and mobile phones. The distinctive competence comes from their expertise in mobile systems. They were first with NMT (G1) and later with the GMS (G2) system currently in use. Ericsson is a company full of engineers and the engineering culture is deeply rooted within the company. It has always been in the forefront in mobile systems and R&D is a cornerstone in this company. However, it is not enough to be good at engineering.

Table of context

1. Introduction

2. Focal firm

3. Competitor

4. Competitive environment

5. Strategic issues
5.1. Superior capacity
5.2. Psychological dominance
5.3. Dynamic control

6. Conclusion

7. Bibliography

1. Introduction

By the end of the eighties the old Swedish telephone company Ericsson stood strong. They had a diversified revenue income stream, operating in defence, radar and second in the world in landline telecom, after the American giant AT&T. Also, a little research project that had started in a lab outside Gothenburg had started to take off. This was wireless telecom and had been identified to have a huge market potential by top management. This new business demanded heavy investments in cutting edge technology but revenue came in from all parts of the firm and Ericsson had the investor’s confidence, backed by the two strongest business spheres in Sweden.

At the same time there was a similar company in the neighbour country of Finland. Nokia, an old engineering company, offered similar products but had lived in the shadow of Ericsson.

Wireless telecom took of and together with internet soon became the growth industry of the nighties. Every trader on Wall Street all by a sudden knew about these two companies from the remote north of Europe. In a rapidly growing market there was money to be made for all players in this field but when the stock market rally of the nineties was over, its little brother from Finland outperformed Ericsson.

This paper will look at the strategic paths these companies took and why the smaller player managed to outperform the giant.

2. Focal firm

Lars Eric Ericsson founded Ericsson 1876. Ericsson has always been a technological driven company, usually with engineers as top management. Ericsson is a diversified company operating in defence, radar, telephone and wireless telephone.

Although a diversified engineering company, Ericsson’s tremendous growth during the nineties comes from their expertise wireless telephoning. This includes mobile systems, components and mobile phones.

The distinctive competence comes from their expertise in mobile systems. They were first with NMT (G1) and later with the GMS (G2) system currently in use.

Ericsson is a company full of engineers and the engineering culture is deeply rooted within the company. It has always been in the forefront in mobile systems and R&D is a cornerstone in this company.

However, it is not enough to be good at engineering. During the nighties, while sustaining their market share and also manage to somewhat increase it in the mobile system area, Ericsson has steadily lost market shares in the mobile phone sector, failing to realize this as a consumer good, a market in witch Ericsson has no experience. Finally, identifying the problem they went into joint venture with Sony. So far that has been a costly venture, minus AUD138M last year. Furthermore, the margins over the period of 1993 to 2001 have been on average 0.7% in the wireless telecom segment, and this in a business that has been identified the high growth area of the nighties.

3. Competitor

Nokia, just like Ericsson, is a European, old engineering company. Nokia traditionally operated in three different business segments; rubber, forest and cable. The cable segment later brought Nokia towards communication and in the beginning of the nineties Nokia disinvested the base industry segments and concentrated on communication. Nokia was in the forefront of wireless telecom together with Ericsson and offered the same types of products: mobile phones, mobile systems and components. At the beginning Nokia and Ericsson was almost equal in the three identified fields but soon they took of in different directions. Nokia could not really match Ericsson’s technical know how in mobile systems and was and still is behind, although not far. In mobile phones however, Nokia took a business approach, identifying mobile phones as a consumer electronic good. Money was spent on marketing packaging and user friendliness. This paid of and Nokia could see their market share steadily increase while Ericsson was loosing out. On top of this Nokia managed to keep their margins over 10%, something Ericsson definitely did not achieve. Today Nokia has a global market share of 40%. Furthermore, they are in a strong financial position and have kept the investor confidence. This means they have money to go to war for and can raise more if needed. Nokia is probably looking at some of the American companies to acquire in order to complement the European mobile systems. Growing by an acquiring strategy in Europe would probably be stopped by the European Commission with regards to anti trust laws.

4. Competitive environment

During the good years every player in the market could make money. Demand was high and capital was easy accessible. In Sweden the telecom market’s share of GNP rose from 1.9% in 1991 to 3.1% in 2001. At it’s peak, Ericsson represented 35% of the total Swedish stock market capitalization.

The European market is today almost fully penetrated and waits for the next generation of mobile telephone technology (G3). The European standard is called WCDMA. The American market is yet not penetrated and uses a different standard called CDMA. South America and Asia still have a long way to go. Neither WCDMA nor CDMA has emerged as the default standard in South America. Asia is leaning more against CDMA and in China it is still ambiguous.

The Telecom industry is capital intensive. Intensive R&D, investments cost regarding extension of the mobile net and skilled labour characterize it. The global economic slow down has hit telecom and dot.com hardest. Negative earnings and cash flows have made manoeuvring hard for all competitors. The level of investments is so low that it is not even enough to do maintenance on the existing net and there is absolutely no money for investing in the new G3 technique. Furthermore, most firms have earlier done business by generous financing deals. Now there is not money for that either. However, the G3 situation is somewhat similar to the G2 situation in the early nineties. The critics then said end consumers could not afford it, the demand was not there and it was to high investments costs. The critics were proven wrong.

The top year for telecom was 2000. Since then every segment of the market has shrunk. Mobile phones have backed 5%, mobile systems 30% and optical components 85%. Many analysts believe this calls for consolidation of the business, where European companies are most likely to consolidate with American companies due to both antitrust laws but also to compliment each other with the WCDMA and CDMA technique together with complimentary customer bases.

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• Université: Bond University Australia
• Note: Distinction
• Auteur: MBA Hakime Isik-Vanelli (Auteur)
• Année de publication: 2004
• Pages: 11
• N° de catalogue: V26485
• ISBN (ebook): 9783638288040
• ISBN (Livre): 9783638748070
• Langue: anglais
• mots-clé: Strategic, Ericsson